B2B marketplaces for scrap metals – an opportunity for foundries

In foundries, metal scrap regularly accumulates, which can be returned to the market as recyclable material and thus into the circular economy. But frequently traders and customers work exclusively with partners they personally know. In consequence this enormous trading potential is not exhausted. Platform economics offers an alternative solution.

According to the Federal Association of the German Foundry Industry (BDG), about five million tons of scrap metal are used in foundries every year. / Photo: Steinert

Companies from the metal industries are always on the lookout for new trading partners. Automotive suppliers, for example, have tons of waste from metalworking, which can be sold at a profitable price. On the other hand, there are foundries and other recyclers who need secondary raw materials on time to ensure production capacity utilization.

Together with other players, the trade in scrap and metals represents a huge market: more than 50,000 companies in the fields of mechanical and plant engineering as well as construction and craft enterprises operate in Germany. In addition, there are about 20,000 companies in metal production and processing, such as rolling and stamping plants or steel producers and foundries. Disposal companies, scrap metal presses and demolition companies also play a role in this context - and together they make up for some 6,000 additional players. [2]

The sheer number of actors is both a curse and a blessing: On the one hand, there are enough suppliers and buyers, so theoretically a healthy degree of competition exists and thus enough room for price negotiations. On the other hand, size and complexity lead to a nontransparent market. As a consequence, market participants have no overview of the market offer and the corresponding price level.

Characterization of the scrap and metal trade in GermanyIn addition to the lack of transparency, the market for scrap and metal offers other peculiarities that make efficient trading more difficult. At first, the trading process is still dominated by analogous processes. Most of the work processes are very traditional, that is by telephone, fax or e-mail. Even if tables and calculations are done on the PC, the bid and billing are too often by letter instead. Orders are placed on the phone and details of the deal are often arranged face to face. Once the latter have been clarified, they must be entered manually into the company's own systems. Thus, trading processes are not only very resource and time-consuming but also error-prone.

Furthermore, the market is overly fragmented due to the diversity of players potentially able to trade in scrap and metals.However, arguably the biggest problem in the scrap and metal trade remains the lack of trust between the market participants. Worries range from deceptions in material composition over unrealistic prices to defaults. Many dealers and customers, therefore, work exclusively with partners with whom personal contact exists. Combined, these circumstances mean that an enormous trading potential is not exhausted. Here, platform economics offer an alternative approach.

Photos: scrappel

The role of platformsIn platform economics, a distinction is made between two types of platforms: technical platforms, which are used, for example, in IoT projects, and market platforms. The latter is usually attributed to the role of the mediator. In a study by the German industry association VDMA, for example, they are defined as: "Intermediaries [...] who use digital technology to connect two or more market participants via the platform and facilitate their interaction." [4]The task at hand is therefore to use Internet-based software in order to bring providers and buyers together and ideally to provide all the necessary steps of the trade (such as information gathering, communication or the payment system). The goal, or added value, that a platform should provide is to minimize the transaction costs of the trading processes.

In addition, platforms often offer value-added services that further enrich the core service of the offering. This is achieved by third-party providers, for example from the financial or logistics sector, offering their services on the platform without being involved in the actual trading process. Suppliers and customers can use services such as transport or credit insurance directly on the platform and benefit from a one-stop solution, in which they do not have to worry about finding external service providers.In the case of metals and recyclables trading, platforms initially offer a market SPECIALoverview. Based on this the players can orientate themselves and be prepared for negotiations on appropriate conditions. The bundling of information about the potential trading partner together with his offer in the selection helps. For example, the question if a seller is open for price negotiation or insists on a fixed price , is answered from the start, thus making it easier to initiate a business contact.If a suitable trading partner is found, the communication is handled via the platform. Instead of getting bogged down in various e-mails, offers and conditions around the business can be matched by (video) chat. If an agreement is subsequently reached, the purchase contract can be concluded directly within the platform. Modern platforms have an integrated document management system that allows them to manage invoices, orders and offers in one central location. This significantly reduces the "paper economy".

Trust and security as decisive criteriaThe central argument for reputable platforms, however, is the solution of the trust problem: To ensure the professionalism and trustworthiness of potential trading partners, platforms like scrappel rely on the "know-your-customer" principle. Initially introduced in the financial industry to prevent money laundering, this generally refers to the screening and verification of company data and personal data of new customers. [5] This prevents dubious offers being made or the authorized representative not being identified in cases of fraud.The same applies to payment processes. A trading partner is usually more willing to close a deal with a completely foreign company if the transaction process is appropriately secured. The best solution are intermediary transfers to a trustee account, on which the purchase amount is deposited and automatically released as soon as the goods receipt is confirmed. In order to completely eliminate the risk of default, third-party services by the factoring industry can also be used. These third-party financial vendors purchase invoices, which immediately gives the seller the purchase price.

Metal scrap comes in a variety of ways, e.g. as chips. In briquetted form, the chips can be traded easier. / Photo: RUF

Special requirements of the foundry industryMany of the benefits described so far are attractive for players in the metal-producing industry. The nature of the German foundry landscape offers good conditions for participation in the platform-based procurement or control of scrap and metals.According to the Federal Association of the German Foundry Industry (BDG), about five million tons of scrap metal are used in foundries every year, making the industry an important component of the recycling industry. More than 95 percent of the approximately 600 German foundries are medium-sized companies. [6] They usually have well-structured ERP systems, making the connection of platforms via standard interfaces a rather simple challenge. Once verification has taken place on the platform and the corresponding connection to the company's own ERP system, foundries have the opportunity to better manage their procurement.

Information on the quality, quantity and type of material offered is presented clearly laid out making it easy to focus on certain types of scrap or metals. For example, if only a new cast can be used for a specific cast, platforms can be searched for this material. Alternatively, potential trading partners can be selected according to the appropriate criteria. For new cast, these would be companies offering explicitly production waste such as laminated cores or cuts.For compliant processing, it is also possible to search for dealers with certifications such as DIN ISO 9001. In addition to the verification process at registration, this provides additional legal security. For maintaining this throughout the entire business process, all the steps taken on the trading platform are documented in a comprehensible manner - from the initiation of the business relationship to the payment of the money. This reduces the error rate of manual entries and increases the efficiency of processing.

Conclusion: There is a need for informationWhile foundries are not part of the New Economy, they can benefit significantly from the latter. As shown in this article, independent platforms can make an important contribution to foundries as participants in scrap trading. If the appropriate requirements of the companies are taken into account, they not only offer new distribution channels for dealers but also make it easier for foundries to control their purchasing and to handle more efficiently their trading processes.

It is therefore surprising that, according to a Bitkom survey, not even half of the companies are familiar with the term " platform economics". [7] Market participants, associations and politics are needed here in order to do more educational work.